Financial players are salivating over opportunities in the Food Products sector following Kraft Foods’ (NYSE:KFT) unsolicited $16 billion for Cadbury PLC (NYSE:CBY). According to Kraft’s CEO, Irene Rosenfeld, "We are eager to build upon Cadbury's iconic brands and strong British heritage through increased investment and innovation." Sounds to us like a reputation (brand) and intangible asset (innovation) opportunity.

So now that the sector is in play, we thought we’d look back over the past year and see how our predictions for value creation panned out. After all, when mergers and acquisitions are all the rage, if you are not at the table, you are on the menu.

Our last look at the Food Products sector was April 14 and was motivated by the sudden decline in the reputation standing of the HJ Heinz Company (NYSE:HNZ) as measured by the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

Six months ago, the top dozen ranked companies in the Food Products sector, according to the Index, included Heinz and Cadbury. Kraft was number 17. Here is our recap of the baker’s dozen with market value as of the close of the markets Friday 4 September before Kraft's announcement.

Heinz, a company that was highly ranked in March 2009 but caught our attention because of a sudden drop in its reputation standing, underperformed the balance of the baker's dozen over the full year with a disappointing -24.5% ROE. Kraft, which lost only 11% over the year, outperformed Cadbury which lost 16.5%. Firms that had a higher reputation ranking in March 09 slightly outperformed their peers. The correlation between rank and six month return was 16%. The top 12 firms, in a demonstration of reputation resilience, outperformed both the S&P Index and the Food Sector index with a loss, as a group, of less than 1%.

One other reputation note. Kellogg and Cadbury, both firms with strong reputation rankings and exceedingly strong brands, reported quality issues related to melamine and salmonella. We know that the impairment of reputation-linked assets such as quality have brought down companies from all sectors. We wonder, for the record, if business process challenges were responsible for making Cadbury an appealing target?

Note added after original posting:

Comments received after posting from readers of MISSION:INTANGIBLE focused on the relatively short window in which we reported economic results. The readers rightly pointed out that the Food Products sector is a long-term business. Tastes may evolve over time, but the business processes associated with delivering tens of millions of safe, quality meals reliably and repeatedly demand eternal vigilance. Consistency is the watchword, and therefore long-term financial results should be included in any discussion of reputation.

We agree. Below, the ten-year returns of the Baker’s Dozen listed above less Campbell’s soup (CPB) due to space limitations. Highest returns: JJSF; lowest returns shown KFT. The only major Food Products sector firm from our top 12 (sector rankings for reputation as of April, ’09) to underperform the S&P500 (10 yr equity return -20%) was CPB (not shown). Prices not adjusted for dividends.